Question

The multiplier effect of fiscal policy predicts that an increase in government spending of $250 billion will increase total income by $1000.00 billion if the marginal propensity to consume is 0.75. If we account for crowding-out, then the increase in aggregate demand will be:

Choose one:
A. less than $1000.00 billion.
B. exactly $1000.00 billion.
C. more than $1000.00 billion.

Answer 1

Answer:A. Less than $1000.00billion

Explanation:An increase in total income will increase agegrate demands but not to the level of the increase in income nor more than it due to the marginal propensity to save.